"The housing correction is at the root of the challenges facing our markets and financial institutions," Treasury Secretary Henry M. Paulson Jr. said Monday.
Sliding house prices have led to wide-scale defaults on home loans, which have hammered financial firms heavily invested in mortgage-backed securities.
This has led to the housing market's current paradox: Spooked investors have fled the mortgage market as house prices plummet, but house prices won't stabilize without more mortgage lending.
Fed rate cuts won't make a difference as long as investors lack confidence in the mortgage markets, said Sung Won Sohn, an economist at Cal State Channel Islands in Camarillo.
The recent rescue plan for Fannie Mae and Freddie Mac has restored some faith, making interest rates relatively low. But with the continuing instability in the financial markets, those low rates benefit only a relatively small pool of borrowers.
Rates for 30-year fixed mortgages that are eligible for government backing -- those below $730,000 -- fell below 6% this month. But rates for jumbo loans, which lenders view as riskier, still hover around 7%.
Five-year new-car loans now average 7.1%, compared with 7.72% a year ago. And credit card rates are down to 11.3% from 14% a year ago, according to Bankrate.com, although those rates are available only to people with top credit ratings.
Moreover, other factors are at play that may push some rates back up. The London Interbank Offered Rate, or Libor, rose 19 basis points Wednesday to 3.06%, its largest increase since 1999. If the increase holds, it could raise interest charges on some adjustable-rate mortgages that are based on Libor averages.
Consumers may have little choice in how to weather the storm.
Scott Leonard, a Redondo Beach financial planner, says that those who are in trouble now are not likely to qualify for loans to refinance their homes or consolidate their bills -- and won't be able to until credit loosens up, rates drop further and prices begin to rise.
"If you're in a bad situation, I'd be surprised if you would be able to refinance [a home mortgage] now anyway," Leonard said.
And many homeowners are in bad situations. The real estate website Zillow.com estimates 71% of Los Angeles-area homes purchased in 2006 and 56% of homes bought in 2007 are now worth less than their mortgage amounts.
